Bentonville or bust

As Wal-Mart's presence in food grows, will all career paths lead to Arkansas?

Mar 15, 2003

To get an idea of Wal-Mart Stores' growing impact on the food industry, you need look no further than Bentonville, Ark., where a rush of food companies hoping to cozy up to the retailer is helping to spawn one of the biggest real estate booms in the U.S.

Along a 30-mile corridor between Bentonville and Fayetteville, an archipelago of office parks sometimes called "Vendorville" accounts for more than 3,000 employees in a metro area of 300,000. Of the more than 450 Wal-Mart vendors that have opened offices in the area, 300 have more than 10 employees, according to local economic development officials -- up from 125 10-employee vendor operations located there just five years ago. The officials expect another 800 vendor offices within the next five years.

Food companies are driving the majority of recent growth in vendor office space, primarily because of the rapid expansion of Wal-Mart's combination food-and-mass merchandise supercenters, says Dina Howell, global marketing director for Procter & Gamble Co.'s Wal-Mart team, which is among the original vendors of Vendorville.

In short, if you work in the food industry in sales, marketing, logistics, finance , even R&D -- it's increasingly likely that you'll spend time in Bentonville at some point in your career. You may not be there permanently, but you may want to get your reservations in now at the Fayetteville Olive Garden, the chain's most requested new restaurant ever.

Wal-Mart has developed an insatiable appetite for food retailing in recent years, and shows no signs of letting up. The rapid rise of its Supercenters has not only made Wal-Mart the largest food store operator in the U.S., but also a major force with food processors.

The numbers are mind-boggling. Wal-Mart's overall sales are increasing at a mid-double-digit pace, and food sales are climbing even faster. In just two years, from 2000 to 2002, Wal-Mart sales climbed 32 percent, to $217 billion. But grocery, candy and tobacco sales from its Wal-Mart, Sam's and Neighborhood Markets grew almost half-again faster , by 46 percent , to $39.4 billion in the U.S. alone. Grocery sales as a percentage of overall sales at the anchor Wal-Mart Stores division, including conventional discount stores and supercenters, increased from 14 percent in 1998 to 22 percent in 2002.

As a result, big food companies find Wal-Mart becoming more important than ever. Such giants as Kraft Foods and General Mills reported that Wal-Mart accounted for more than 10 percent of their global sales last year , a first for those companies.

As Wal-Mart's importance grows, so, too, does its influence on the strategies of food companies. Retail consolidation in general, and Wal-Mart's growing food-store dominance in particular, are the chief drivers of consolidation in the food industry, according to a former chief executive of a food company that recently consolidated.

A $15 billion game

He sees a minimum of $15 billion in global sales as the amount required to compete most effectively , a level only a handful of food companies, including Kraft, Unilever, Nestle, Coca-Cola Co. and PepsiCo, have achieved. The scale isn't necessary to gain leverage in global procurement , something that still doesn't really occur despite the global scale of Wal-Mart and other players. "The reason," he says, "is that at $15 billion, you start having the scale to put a significant number of people in Bentonville."

Procter & Gamble, perhaps the original resident of Vendorville, has more than 300 employees there, with more stationed at Wal-Mart headquarters in Europe, Asia and Latin America. As the big food players bulk up, they're adding to their Wal-Mart teams as well.

As big an influence as it is, Wal-Mart stands to wield even greater clout in coming years as it expands its supermarket-size Neighborhood Markets and explores establishing a wholesale grocery division.

Until recently, the Neighborhood Markets concept had been developing slowly. As of April 2002, Wal-Mart had only 31 of these so-called "Small-Marts," all located fairly close to Bentonville in states such as Arkansas, Texas and Oklahoma. However, Wal-Mart recently announced plans to build 25 more in Florida alone, starting next year, and has begun building them in Utah as well.

Making Neighborhood Markets as profitable as Wal-Mart Supercenters has been a challenge. The modus operandi for Wal-Mart and other supercenter owners has been to attract shoppers with low food prices and make the bulk of their profits on hardlines, clothes and other non-food items. But with less room for non-food items, Neighborhood Markets have been less profitable.

Perfecting a prototype

In its latest Neighborhood Market prototype, located in Rogers, Ark., Wal-Mart apparently found a solution. Situated in a lower-income and heavily Hispanic neighborhood, the store has an upscale look, with more space devoted to produce and meat, including vertical displays to make the best use of space. Prices are still largely the same as those of a supercenter, but the pharmacy and beauty aids section is oversized compared to those of other Neighborhood Markets and most competing supermarkets. In a tactic reminiscent of old five-and-dimes or even Kmart's original "Blue Light Specials," store managers get on the store intercom to highlight deals , primarily in the higher-margin pharmacy, HBA or fresh-foods sections.

While growth of Neighborhood Markets will allow Wal-Mart to plant its food-store flag in places too small for supercenters, expansion into wholesale retailing could allow it a presence in stores it doesn't even operate. Wal-Mart has quietly begun approaching independent and small-chain retailers -- which typically buy from such wholesalers as Supervalu, Fleming and Nash Finch -- with plans to begin full-scale operations by late 2003 or 2004, according to retail and wholesale executives. Wal-Mart declined to comment.

Wal-Mart already owns the nation's largest convenience-store distributor , McLane Co. , and a wholesale grocery division would give it a presence in the one area of food retailing from which it is absent. A wholesale division could give Wal-Mart a stronger presence in the Northeast, where high real estate prices, lack of available land and a strong union presence have made it harder for Wal-Mart to operate its own stores. By providing independents and small chains with lower prices than they currently get from wholesalers, Wal-Mart could also further squeeze its primary competitors in the supermarket industry, including Kroger Co., Safeway, Albertson's and Publix.

"At some point, you have to wonder if anti-trust becomes an issue," says Ken Harris, partner with Wilton, Conn.-based consulting firm Cannondale Associates.

But David Balto, a former Federal Trade Commission (FTC) official who spearheaded the group's investigation of slotting fees and is currently a Washington, D.C., antitrust attorney, doubts that a successful anti-trust case could be launched against Wal-Mart. The ultimate legal standard is whether consumers are getting hurt, he says, and clearly they haven't been hurt yet by Wal-Mart's low prices.

The Robinson-Patman Act, which requires manufacturers to provide equivalent terms to all trade customers, might be more of an issue as food companies keep beefing up their Bentonville contingents. But the law allows manufacturers to offer better terms based on volume, and no supermarket chain can compete with Wal-Mart's volume anymore. With its reputation for efficiency, Wal-Mart also offers better execution of manufacturer promotion programs than most of its competitors.

He believes the growing strength of Wal-Mart is emboldening big food processors to take a tougher line with their other customers. He points to Kraft Foods' recently adopted policy to withhold some of its slotting fees until the new products actually arrive on supermarket shelves.

Going global

Growth of Wal-Mart and other global retailers also is driving the growing emphasis on big global brands over smaller, local ones among such heavyweights as Unilever, which has passed the halfway point of its plan to trim 1,200 brands from its global roster.

Charles Strauss, President of Unilever U.S., acknowledged in a December 2001 interview that growth of Wal-Mart and other retailers was a factor in the company's decision to focus its marketing and innovation efforts on bigger brands. What Unilever calls its "destination brands," such as Dove, Lipton or Slimfast, are important enough to consumers that even big mass merchandisers can't afford to be without them.

As potentially daunting as Wal-Mart's size is, Unilever and other home and personal-care players have learned that life with the retail giant isn't all bad. In fact, many of them, including P&G, Clorox and Dial, already derive 17 to 25 percent of their sales from Wal-Mart -- twice or more the proportion for some big food companies today. Yet their operating margins remain higher than those of food companies, despite dealing with so much power on the other side of the bargaining table.

Even relatively small players can play ball with Wal-Mart successfully. Dial Corp., a $1.3 billion company that markets Dial soap and Armour canned meats, is smaller than some brands at major food and non-food rivals. But Dial, which did more than 25 percent of its business with Wal-Mart, saw its market share for Armour and its other brands grow faster at Wal-Mart last year than in the rest of the market.

On the other end of the global heft scale, P&G does 17 percent of its business with Wal-Mart, nearly half of the 35 percent of its sales that derive from its 10 largest global accounts. But sales growth rates with the Top 10 run twice that of the company's overall growth, Chairman-CEO A.G. Lafley said at an investor meeting in December.

One reason is P&G's ability to execute marketing programs with Wal-Mart. A women's health program P&G sponsored in conjunction with Wal-Mart last year returned $5 in increased sales for every $1 invested, according to global marketing officer Jim Stengel.

Lafley believes that size ultimately plays to P&G's advantage in dealing with Wal-Mart and the other big retailers. "Retail consolidation," he says, "actually plays to our strengths."

There goes the Neighborhood

1997

1998

1999

2000

2001

2002

Wal-Martdiscount stores

1,9951,9601,9211,8691,7361,647

Wal-Martsupercenters

3444415647218881,066

NeighborhoodMarkets

004111931

GlobalSales

$104.9$118.0$137.6$165.0$191.3$217.8

Grocery, candy, tobacco as % of U.S. store sales

11%14%16%18%19%22%

Source: Wal-Mart Stores filings with U.S. Securities and Exchange Commission. Dollars in billions for fiscal years ending March 31.